IRS Beneficiary IRA Rules for Inherited Accounts

Inheriting an Individual Retirement Account (IRA) means you are the beneficiary of assets left by a deceased individual. The Internal Revenue Service (IRS) has a specific framework for how these funds must be managed, and recent legislative changes have altered the timelines for accessing them.

These regulations dictate how quickly the account must be depleted. The path a beneficiary must follow is determined by their relationship to the original account owner and the date the owner passed away.

Determining Your Beneficiary Category

The IRS classifies IRA beneficiaries into distinct categories, and your classification dictates which set of withdrawal rules you must follow. These classifications are based on your relationship to the decedent and certain personal circumstances.

Eligible Designated Beneficiaries (EDBs)

This classification provides the most flexibility for withdrawing inherited funds. The IRS defines five types of individuals who qualify as an Eligible Designated Beneficiary (EDB).

• The surviving spouse of the account owner.
• A minor child of the original account owner, which applies only until the child reaches age 21.
• A disabled individual, according to strict IRS definitions.
• A chronically ill individual, according to strict IRS definitions.
• Any individual who is not more than 10 years younger than the deceased account owner.

Designated Beneficiaries (DBs)

The category of Designated Beneficiary (DB) applies to most individuals who inherit an IRA but do not qualify as an EDB. This group includes adult children, grandchildren, other relatives outside the 10-year age window, and friends. For any individual named on the IRA’s beneficiary form who does not meet one of the five EDB criteria, this is the default classification.

Non-Designated Beneficiaries

This category is for any beneficiary that is not a person, such as the decedent’s estate, a charitable organization, or certain types of trusts. If an IRA owner fails to name a living person as a beneficiary or names their estate, the assets will be handled according to the rules for non-designated beneficiaries. These rules are the most restrictive, requiring the fastest distribution of the assets.

Distribution Rules Based on Beneficiary Type

The rules for when and how you must withdraw funds from an inherited IRA are tied directly to your beneficiary category. Failing to take a required withdrawal can result in significant penalties.

Rules for Surviving Spouses (an EDB)

A surviving spouse has the most options. The primary choice is to treat the inherited IRA as their own by rolling the assets into their personal IRA. This spousal rollover allows the surviving spouse to become the new owner, delay required minimum distributions (RMDs) until their own required beginning date, and name their own beneficiaries.

Alternatively, a surviving spouse can open a new inherited IRA. This allows them to begin taking distributions without the 10% early withdrawal penalty, even if they are under age 59½. When opening an inherited IRA, the spouse can take distributions based on their own single life expectancy or follow the 10-year rule.

Rules for Other Eligible Designated Beneficiaries

EDBs who are not the surviving spouse can take distributions from the inherited IRA over their own life expectancy. This method, often called a “stretch” IRA, allows the funds to be paid out slowly, preserving the tax-deferred growth of the account for a longer period.

A minor child of the account owner also qualifies for this life expectancy payout, but only until the child reaches age 21. Once the child reaches the age of majority, they become subject to the 10-year rule. The clock starts at that point, requiring the full balance to be withdrawn by the time they turn 31.

Rules for Designated Beneficiaries

Most non-spouse beneficiaries are subject to the 10-year rule, which mandates that the entire balance of the inherited IRA must be withdrawn by December 31st of the 10th year following the year of the original owner’s death. For example, if the owner died in 2025, the beneficiary has until December 31, 2035, to empty the account.

Whether annual withdrawals are required during this 10-year period depends on if the original owner had started taking their own RMDs. If the original owner died before their RMDs began, the beneficiary is not required to take annual withdrawals.

However, if the owner had already started taking RMDs, the beneficiary must also take annual RMDs in years one through nine of the 10-year period. As of 2025, these beneficiaries must take their annual distributions to avoid penalties.

Rules for Non-Designated Beneficiaries

When the beneficiary is an entity like an estate, the distribution rules are more compressed. If the original account owner died before their required beginning date for RMDs, the entire IRA balance must be distributed within five years of their death.

If the owner died after they had started taking RMDs, distributions must be taken out over the deceased owner’s remaining single life expectancy had they lived. This requires annual withdrawals from the account until it is depleted.

Tax Treatment of Inherited IRA Distributions

Understanding the tax consequences of withdrawals is important. The tax treatment depends on whether the inherited account is a Traditional IRA or a Roth IRA, and the beneficiary’s income tax bracket will determine the final tax liability.

Inherited Traditional IRAs

Distributions from an inherited Traditional IRA are considered taxable income. The funds were contributed on a pre-tax basis and grew tax-deferred, so withdrawals are taxed at the beneficiary’s ordinary income tax rate.

In some cases, the original owner may have made non-deductible contributions. If so, a portion of each distribution is considered a tax-free return of those contributions. This requires tracking the pro-rata share of each withdrawal that is non-taxable, often done using IRS Form 8606.

Inherited Roth IRAs

Withdrawals from an inherited Roth IRA are usually completely tax-free because contributions were made with after-tax money. For a distribution to be “qualified,” meaning both contributions and earnings are tax-free, the original Roth IRA must have been opened for at least five years before any withdrawal is made.

This five-year holding period starts on January 1 of the first year the original owner made a contribution to any Roth IRA. If a beneficiary takes a distribution before this five-year period is met, the earnings portion of the withdrawal could be subject to income tax.

Tax Withholding and Reporting

When you take a distribution, the financial institution reports the withdrawal to you and the IRS on Form 1099-R. This form shows the gross distribution and any taxes withheld. Beneficiaries can request voluntary income tax withholding from their distributions to avoid a large tax bill when filing their annual return. The information from Form 1099-R must be reported on your personal income tax return, Form 1040.

Required Actions and Deadlines for Beneficiaries

After determining your beneficiary category, you must take specific steps to claim and manage the inherited IRA. Acting promptly and correctly is necessary to ensure compliance with IRS regulations.

Establishing the Inherited IRA

A non-spouse beneficiary must establish a new, separate account known as an inherited IRA. This account must be properly titled in the name of the deceased owner for the benefit of the beneficiary, for example, “[Original Owner’s Name], Deceased, FBO [Beneficiary’s Name].” This titling keeps the inherited funds separate from your personal retirement savings.

The process begins by contacting the financial institution where the decedent’s IRA is held. You will need to provide a copy of the death certificate and complete the institution’s paperwork to open the new inherited IRA.

Key Deadlines

For those who must take annual RMDs, the deadline for each withdrawal is December 31 of that year. Missing a deadline to take a required distribution can result in a substantial penalty.

Another deadline applies when a trust is named as the beneficiary of an IRA. To use the more favorable “see-through” trust rules, the trustee must provide the IRA custodian with a list of all trust beneficiaries by September 30 of the year following the owner’s death.

Taking a Distribution

To take a distribution, you must contact the financial institution that serves as the custodian for your inherited IRA. The process involves completing a distribution request form where you specify the amount you wish to withdraw. On this form, you will also make an election regarding tax withholding. The funds can be sent via electronic transfer or by check.